small business Entrepreneurs offering perks to small investors willing to give seed money

Published 4:00 am, Sunday, November 13, 2011

Cortt Dunlap, stands in the middle Awaken Cafe in downtown Oakland as the cafe is being built on Friday, November 11, 2011. In order to finish up some of the work, Dunlap has turned to crowd-funding.

Cortt Dunlap, stands in the middle Awaken Cafe in downtown Oakland as the cafe is being built on Friday, November 11, 2011. In order to finish up some of the work, Dunlap has turned to crowd-funding.

Photo: Erin Lubin, Special To The Chronicle

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Restaurant owners and business partners, Daniel Patterson, left, and Ron Boyd, right, sit at the bar next door to their restaurant Plum in downtown Oakland Friday, November 11, 2011. Patterson and Boyd are looking to crowd-funding to assist in the financing of their new business endeavors. less

Restaurant owners and business partners, Daniel Patterson, left, and Ron Boyd, right, sit at the bar next door to their restaurant Plum in downtown Oakland Friday, November 11, 2011. Patterson and Boyd are ... more

Photo: Erin Lubin, Special To The Chronicle

Image 3 of 4

Cortt Dunlap, stands in the middle Awaken Cafe in downtown Oakland as the cafe is being built on Friday, November 11, 2011. In order to finish up some of the work, Dunlap has turned to crowd-funding.

Cortt Dunlap, stands in the middle Awaken Cafe in downtown Oakland as the cafe is being built on Friday, November 11, 2011. In order to finish up some of the work, Dunlap has turned to crowd-funding.

Photo: Erin Lubin, Special To The Chronicle

Image 4 of 4

Cortt Dunlap, stands in the middle Awaken Cafe in downtown Oakland as the cafe is being built on Friday, November 11, 2011. In order to finish up some of the work, Dunlap has turned to crowd-funding.

Cortt Dunlap, stands in the middle Awaken Cafe in downtown Oakland as the cafe is being built on Friday, November 11, 2011. In order to finish up some of the work, Dunlap has turned to crowd-funding.

Photo: Erin Lubin, Special To The Chronicle

Entrepreneurs get creative to raise funds

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It takes a village to raise a restaurant. That's the tack some small-business owners are taking to fund their fledgling cafes and bars.

Three years ago, Cortt Dunlap, a massage therapist, wanted to open an espresso bar in downtown Oakland. He needed $30,000 to get started.

Given the fallout from the subprime mortgage crisis, it was tougher than ever to get a bank loan. Dunlap didn't even try, he said. Instead, he got creative.

Before he even opened, Dunlap started selling gift cards worth $1,250 for $1,000. He managed to get his startup cash and then some, allowing Awaken Cafe to morph from a dream to reality. The federal Securities and Exchange Commission, which is somewhat persnickety about selling discount programs for companies that don't yet exist, probably would have put a stop to Dunlap's fundraising methods had it known. This time around - Dunlap is trying to raise another $10,000 so Awaken Cafe can move to a larger space - he's going a different and legal route.

But it's untraditional just the same. He's asking for cash pledges in exchange for a few perks such as gift certificates, coffee subscriptions and special tasting events.

It's called crowd-funding, and like Dunlap, more restaurateurs are relying on pledge-based fundraising websites such as Kickstarter and locally based IndieGoGo to find seed money. Or they're turning to their neighbors. Unlike regular investors, these backers don't get shares in the company, dividends or a say in how the business is run.

So why the heck do it?

Lots of reasons, said Jenny Kassan, a lawyer and CEO of Cutting Edge Capital, an Oakland company that helps entrepreneurs find creative funding for their small businesses, while navigating the intricacies of SEC rules.

"There's a real interest in people wanting to support their communities," she said. "A lot of people are proud of where they live and want to see that neighborhood thrive. It makes them feel part of a team. They also see it as a surer bet than Wall Street, which has become a casino."

If community-based businesses are successful, they pump money into the local economy, create jobs and ultimately drive up real estate prices in the neighborhood. It's a win for everyone, including beginner entrepreneurs who are finding it more difficult than ever to fund their projects the standard way, Kassan said.

"Bank loans have pretty much dried up," she said. "And wealthy investors aren't investing as much as they used to."

It's also cost prohibitive for small businesses to take on anyone the SEC sees as an unaccredited investor - a person who doesn't have $1 million in assets (not including their home) or makes less than an annual income of $200,000.

"It costs tens of thousands of dollars in legal fees," Kassan said about setting up an investment structure designed to protect both sides from getting duped. Pending legislation, which has passed the House and is in the Senate, would loosen those rules.

In the meantime, restaurateurs are coming up with all kinds of incentives to get members of the public to donate to their cause. Dunlap's pledge-drive page is scheduled to go up on IndieGoGo in the next couple of days. There, depending on the level a person chooses, a backer can get everything from barista lessons to a catered office party.

"We're still working out the details," he said, adding that besides some good perks, a donor gets the satisfaction of knowing that he or she is making downtown Oakland a better place.

AQ, a newly opened neighborhood restaurant in San Francisco's SOMA district, set out to raise $25,000. Co-owner Matt Semmelhack went to Kickstarter, offering everything from T-shirts to behind-the-scenes tours in exchange for pledges. The restaurant won 172 backers - including several residents of the neighboring Soma Grand condominium complex - and raised $28,115.

"The most popular was the $25 tier," Semmelhack said. "For that one you got your name or a loved one's name on a plaque attached to one of our 100-year-old bricks. The idea was they were helping build the business brick by brick."

"It was the Obama campaign that said, 'You can get $10 million from 10 people, or you can get $10 million from 10 million people,' " he said. "The 172 people who made pledges will probably all eat in the restaurant."

Four-star chef Daniel Patterson opened the second phase - the bar - of his Oakland restaurant Plum this month. Now he needs to pay for the last 5 percent of the cost of making it happen. So he's inviting customers to be "seatholders." For $500, a seatholder gets the benefit of 20 percent discounts off the tab for a table of four for the lifetime of the restaurant, priority reservations and invitations to special events.

Patterson said he loves the idea of sharing a sense of propriety with his customers.

"It's like an old-fashioned barn-raising in a sense," he said. "It builds community. And if the experiment works, we'll use it again for our next restaurant."

So far - the offer only went into effect a couple of days ago - about 10 people have responded, Patterson said.

Donovan Unks, a 34-year-old biotech researcher living in San Mateo, jumped on it immediately.

"I have friends in the East Bay, and I've been to Plum a few times and think it's a really cool idea," he said, adding that he's a fan of Patterson and the restaurant's bartender Scott Beattie. "I want to back the people I believe in."

Unks said he'll probably visit the restaurant once a month.

Patterson said he'll probably cap the offer at 500 people. But the program could still be costly to the chef.

What if seatholders take advantage of their discount every night of the week?

His response was quick. "Then I'll have a full restaurant, and God bless them."

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